Mining companies say gold price to peak at $2,000/oz in 2012–PwC
However, mining companies are struggling to reap the ultimate benefits of a high gold price, according to the PwC study, 2012 Gold Price Report, Keeping up with the price of gold.
As PwC Mining Leaders John Gravelle and Tim Goldsmith observed, “While revenues and cash flows are higher, the stocks of many companies are not reflecting the increased price of gold.”
Through Dec. 15, 2011, the gold price has risen 11%, but gold stocks within the S&P/TSX Global Gold Index have declined 10.6%. “Though not the only culprit behind this disparity, the availability of a wide range of financial products that allow one to invest in gold, such as exchange traded funds (ETFs), have change the game for gold mining executives,” they observed.
The PwC report asserts that mining companies “have perceived strikes against them. They are dealing with escalating costs, labour issues, geopolitical risks and competition for investors’ share of the wallet.”
The average price that will be used in mining planning this year is $1,420, up from $1,130 in 2010, said the PwC study. The price gradually declines to $1,130 in the long term. “This represents a 20% increase from last year’s long-term price projection-great news for gold mining executives and gold investors,” the report noted.
“From the results from our survey, mining executives have laid out a game plan,” the report observed. “They plan to get more creative with dividends, get a tighter handle on escalating costs, push forward with growth plans and make strategic acquisitions.”
The 2012 PwC survey asked mining executives how they would use additional cash if they experience an increase in cash on their books. Seventy five percent of those surveyed said they would use the extra cash for project development, while 54% would spend the money on exploration spending. Twenty nine percent of those surveyed would use the money for acquisitions while 25% would use the money to pay dividends.
“With gold experiencing a superb year in 2011 and expecting an even more superb year in 2012, a poor dividend payment by gold companies may result in a further exodus of investors from the gold equities market,” PwC cautioned.
As of Nov. 30, 2011, dividend payments for the top 20 gold companies, according to market capitalization, were up 44% from 2010. “It’s another marker for the history books as this will be one of the largest increases in dividend payment in gold stock history,” PwC observed. PwC analysts expect this trend to heat up throughout 2012.
In the report, the analysts praised the decision of a number of mining companies to link dividends to gold’s performance. “The benefit to investors is a clearer understanding of how their dividends will change. The benefit to the management team is that they can be more aggressive with dividend rates without concern of maintaining levels in the long term if gold declines sharply.”
Of the 99 mining strikes which occurred from Jan. 1, 2009, to Dec. 1, 2011, the highest number of strikes was at gold mine sites (23%) with 70% of the strikes being aimed at seeking higher wages. The gold companies that experienced strikes during that period, they suffered a decline in production that averaged 550 ounces a day, according to PwC.
The average length of the strikes suffered by gold companies was 25 days while the average for all mining companies was 36 days from 2009-2011.
In their survey PwC looked at how the strike announcement impacted the stock price of a gold company. “What we found was that 53% of companies during this time period experienced a decrease in their stock price. But for 47% of the companies, the strikes didn’t seem to impact investor confidence as their stock price actually increased during the strike period.”
Forty eight percent of the gold company strikes occurred in South America and 35% occurred in Africa.
GOLD COMPANY M&A
With 40% of gold mining companies planning to replace reserves through acquisitions, “it is safe to say acquisitions are back on the minds of gold mining executives,” said PwC.
“It has been an outstanding year for gold acquisitions,” the report observed. “There have been 544 transactions valued at approximately $11.2 billion. Cash-fat, acquisition-hungry companies are in the driver’s seat, as they are able to launch takeovers of smaller exploration-based companies that are not certain when the current market malaise will lift.”
The report also noted that average deal values are holding up well as gold targets have been acquired for an average of $35.7 million. PwC expects to see high premiums in the gold sector remain strong throughout this year.
Of those mining executives surveyed, 57% said they anticipate funding for M&A and capital expenditures to be readily available this year.
PwC’s 2012 Gold Price Report surveyed companies representing 26.5 million ounces of gold mined in 2011 and 37.75 million ounces to be mined in 2012.
iPad Version – Gold and silver bars are pictured in front of a safe door at the Austrian Gold and Silver Separating Plant ‘Oegussa’ : Lisi Niesner / Reuters